3 May 1995 CICA Roundtable, 9512370 - U.S. ALTERNATIVE MINIMUM TAX

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

DRAFT

ALBERTA CICA ROUND TABLE

Question No. 13

FOREIGN TAX CREDIT - U.S. ALTERNATIVE MINIMUM TAX

It has been our experience that a U.S. citizen who is resident in Canada and earning only "Canadian source" income can be subject, under the Internal Revenue Code (the "Code"), to U.S. alternative minimum tax ("AMT") for which no foreign tax credit is allowed in the U.S. for Canadian tax paid. This is due to the "90% limitation" on the foreign tax credit for AMT purposes. This U.S. AMT does not appear to be a creditable tax under the Act.

If, in a subsequent year, the taxpayer earns U.S. source income resulting in "U.S. regular tax" in excess of U.S. AMT, the U.S. AMT credit balance from previous years may be used to reduce the U.S. regular tax. If the taxpayer is still a resident of Canada (i.e. taxed in Canada on worldwide income), the U.S. source income will be subject to tax in Canada with a foreign tax credit for U.S. taxes paid to the U.S. tax authorities. The U.S. AMT credit reduces the U.S. regular tax and reduces the Canadian foreign tax credit, even though the U.S. AMT was not creditable for Canadian tax purposes. In substance the taxpayer is double taxed to the extent the U.S. regular tax liability has been reduced by the U.S. AMT credits.

What is Revenue Canada's position regarding claiming a foreign tax credit on the U.S. regular tax before applying the U.S. AMT credit?

Department's Position

Pursuant to paragraph (d) of the definition of non-business-income tax in subsection 126(7) of the Act, U.S. AMT on Canadian source income is not a non-business-income tax and is therefore not a creditable tax for foreign tax credit purposes in Canada under the Act. Under the Canada-U.S. Income Tax Convention (the "Convention"), Canada has the right to tax this income and the U.S., not Canada, should be granting credit in respect of the Canadian tax.

Paragraph 2 of Article XXIX of the Convention states that, except as provided in paragraph 3, nothing in the Convention shall be construed as preventing Canada from taxing its residents and, in the case of the U.S., its citizens, as if the Convention did not exist.

Paragraph 3 of Article XXIX provides that paragraph 2 shall not affect the obligations undertaken by a Contracting State under, inter alia, Article XXIV (Elimination of Double Taxation)

Paragraph 3 of Article XXIV, states that, for purposes of that Article, income of a resident of Canada which may not be taxed in the U.S. in accordance with the Convention (without regard to paragraph 2 of Article XXIX) shall be deemed to arise in Canada. If the Convention is read without regard to paragraph 2 of Article XXIX, "Canadian source" income received by a resident of Canada would not be subject to tax in the U.S. under the Convention and such income would therefore be deemed to arise in Canada for purposes of Article XXIV.

Paragraphs 1 and 2 of Article XXIV are subject to paragraphs 4, 5 and 6 of that Article. Paragraphs 4, 5 and 6 provide special rules for U.S. citizens who are resident in Canada. Under subparagraph 4(a), Canada would not have to allow a credit in respect of U.S. tax paid on the above income as such income does not arise in the U.S. for purposes of that Article. Under subparagraph 4(b), the U.S. shall allow as a credit against U.S. tax the income tax paid or accrued to Canada after the deduction (in this case nil) computed under subparagraph 4(a). Paragraphs 5 and 6 do not apply to this situation as they only deal with income that otherwise arises in the U.S. under Article XXIV.

As paragraph 1 of Article XXIV is subject to paragraphs 4, 5 and 6, and these paragraphs are not subject to U.S. domestic tax law, the credit to be allowed by the U.S. under the Convention should not be affected by the 90% limitation in the U.S. AMT rules.

It is our understanding, however, that the U.S. has, through the enactment of the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), legislated in their domestic tax law a specific treaty override with respect to the foreign tax credit under the AMT rules. It is our understanding that the U.S. tax authorities consider the treaty override in TAMRA to take precedence over treaties that were in effect at that time. Revenue Canada does not share that view. The Department of Finance as well as the Competent Authority of Revenue Canada have had ongoing discussions with the U.S. authorities on this matter, but without any success to date.

Where the taxpayer has both Canadian source income and U.S. source income it may be difficult to determine to what the U.S. AMT credit relates. Where, however, it is established that the U.S. AMT for a particular year clearly relates to Canadian source income and in a subsequent year the U.S. tax on U.S. source income is reduced by the AMT credit related to that Canadian source income to an amount that is below that which Canada would otherwise have been required to provide a credit for in accordance with subparagraphs 4(a) and 5(b) of Article XXIV of the Convention, it may be arguable that the taxpayer's foreign tax credit for that subsequent year as determined in accordance with the Convention should be based on the U.S. tax before applying the U.S. AMT credit. As the matter is not free from doubt and as it is not apparent that this could happen, if there is an actual case the full details should be referred to the Department for our consideration.

Author: Tim Kuss
File: 951237
Date: May 3, 1995